This week David Cameron released the much-anticipated open public services white paper that declared an end to the "state monopoly" on public services. TUC general secretary Brendan Barber discusses the fine detail with Phillip Blond, architect of the big society. Oliver Laughland listens in.

Brendan Barber: From my point of view, this looks like a pretty frightening prospect. The idea of opening up all of our services to competition is ultimately a route to massive privatisation. Although you might support the idea of other forms of ownership, co-operative mutuals and so on, the reality too often is that it's the private sector that steps in. If you look at the work programme and the big contracts that have just been issued, out of 18, 15 have gone to the private sector. People do not see this marketisation push by government as a move in a genuine spirit of innovation. They see it as another route to cost-cutting and privatisation.

Phillip Blond: I don't think that's the intention. What's clear in everything that's said in the paper is "diversity of providers". There's explicit recognition of what happened under New Labour where most contracts went to just three companies and there was a transfer from public to private monopoly. But I'm not opposed to competition. Competition is a clear driver of quality. Of course, if you just compete on price, this can deliver the wrong sort of outcomes. So what guards against mass privatisation is the requirement for diversity and the payment on outcome.

BB: But what we've not seen is convincing evidence that the private sector is able to deliver better outcomes. The public accounts committee looked at the performance of providers who'd been contracted to deliver some of the key employment services and came up with a wholly negative view of their performance. In terms of mainstream services that people need in the labour market, the evidence simply isn't there.

PB: The state is already failing. When I look at Britain I think in many ways we're turning class into caste. We're making it harder and harder for people from disadvantaged communities to get ahead. I don't think it's the case that all state is bad or private sector good, but let me quote you an example of one solution I favour. Take the Sandwell Community Care Trust, which was spun out as a mutualised charity caring for the elderly by the local authority in 1997. In 2006 it was analysed. The most telling example of success is that residential care for the elderly had cost the authority £657 per person per week, whereas the trust reduced it to £328 per person per week. The staff were happier, the residents were much happier. What we do is strip out all the costs of the old model, of the centralised state delivery that was so damaging, and we create a model where staff are valued .

BB: The government can talk the language of mutuals and innovative social enterprises in which employees and their support is key to the model. But the reality is very different because we've seen a host of PCTs, for example, where when the staff have been given an opportunity to express a view – in Cornwall 81% voted against mutualisation, in Plymouth it was 74%, in mid-Essex it was 97% – was there strong employee support? No, but did that stop them from going ahead? They went ahead anyway. This wasn't about empowering employees, this was about railroading employees into a new structure that they didn't support.

PB: I'm not in favour of anybody being railroaded. But to make the broader philosophical point, unless we break down the distinction between capital and labour we're not going to progress as a country. One of the reasons we're falling so far behind is because we've created a workforce that doesn't have a stake in the outcomes it produces. What sort of innovations would you favour?

BB: We've developed, with a body called the public services forum, a toolkit on employee engagement, looking at examples of good practice, where public service managers have sat down openly with the workforce, their manager, the unions, to look at how they capture their ideas, and we've seen the delivery of services transformed in some areas through that kind of dialogue.

PB: It doesn't sound innovative enough. It seems to me that the trade union movement should be more radically behind the John Lewis type model for public service delivery. The real gains that could be there for workers aren't being pursued because future innovations threaten the current structure of representation.

BB: It's not about flashy ideas, it's about real, nitty-gritty, work together.

PB: It sounds like more of the same.

BB: Look, this debate is all taking place against the background of the biggest cuts in public spending we've seen in our lifetimes that are not only impacting on public services and morale in a massively negative way, but alternative providers, as well. The government say they want to bring them in to the delivery of services ... the reality is that all of those sectors have been massively hit by spending cuts, too. This is about privatisation – that's what people believe and I think all the opinion poll evidence supports that.

PB: The difficulty for the big society is that it's been born in the most difficult of times. It has nothing to do with cuts, it was conceived before cuts, before Lehman Brothers etc. I'd much rather have a debate about how we innovate in the face of austerity. This white paper is profoundly innovative.

BB: But there are huge questions about where public trust lies, aren't there? Look at Southern Cross, for example, with a hugely important social function, out there in the market place. Blackstone step in, they fire up £160m, then three or four years later, they realise a profit of something like £600m, they take that out of the business, and disappear heading for the hills, with this massive profit, and leave a business massively struggling. It finishes up with David Cameron saying we'll have to pick up the tab. Where is the accountability?

PB: Let's be clear, Southern Cross is the failure of the old, post-Thatcherite agenda. It's not the failure of the big society or of the new government, and I agree completely with Brendan on his analysis of Southern Cross. But in the white paper it's very clear that when you have risk and failure, it isn't something that is picked up by the government. This is what payment by results means.